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How is economic policy determined and implemented in the united kingdom?

Persona dramatis

Policy objectives and scope

Mechanisms and measures

Systems of policy implementation

Historical perspective

Determining agencies and institutions

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Ball Report.1978. Economic Policy Optimisation. ( Cmnd. 7148 ).

Barbelis, P. and May, T. 1993. Govemment Industly and Political Economy. ( Ch 1 ).

Caparaso, J.A. and Levine, D. Theories of Political Economy. ( pp 151-154 ).

Dean, P. 1989. The State and the Economic System.

Dearlove, J. and Saunders, P. 1995. An Introduction to Bntish Politics.( pp 260-295 ).

Dell, E. 1996. The Chancellors: 19945-1990.

The Economist. 1996 The Great Debate. 21st of September.

Gillie, A.> l9X7. Politics and Economic Policy. ( Part 1 ).

There is a basic conflict in forming a consistent economic policy. On the basic level there is a pure economic theory, e.g. about the unity and how it eliminates the transportation costs, how monopolies will exploit the market, etc. Most of theories can however be normative as it is usually first time people have to deal with things like EU and thus there is no way the theories about it can be based on direct evidence. But ultimately it should be possible to prove them with positive economics once the reform has happened, if one can keep the ceteris paribus.

On the second layer there is the political level of different party ideologies concerning ideas about the nation, sovereignty, power, democracy, class analysis and structure together with income inequality and taxation and finally the political process of election. It is quite hard to make contrasting examples about that for England as both major parties are like a New Right, basically supporting market freedom and democracy. Old Labour used to believe that the working class should co-ordinate the economy through trade unions, now it is a pro single market party supporting a stake-holding in society, that encourages greater participation of individuals. Conservatives are considered the national unification party opposing federalism, independence first then co-operation being one of their aims. Both parties are however so far developed that they realise there is no need for an ideology for getting re-elected, so they just deal with the day to day running of country.

Third level is the opinion of public and media. Their views can differ considerably from the first two. For example the reason many people don't want EU is that then they could not have the Queen on post-stamps, etc.

All these levels are strongly interacting with each other and each policy must be supported by all three of these. There are some main areas of economic policy that each government must adapt in some sense. All the policies must allocate the scare economic resources through the economic system. It can either be done by the market - private sector or government (public sector). Conservatives have encouraged the market allocation based on M. Friedmans ideas of all markets tending towards a stable equilibrium unless there is a bureaucratic intervention. Thus conservatives have privatised many national industries, apparently so successfully that several countries are copying them.

Economic policy has also a distribution function. It might be that the efficient markets may not produce an equitable distribution of income. That is why economic policy now includes transfer payments (transferring money from one sector to another through the means of taxes, like pension schemes to help elderly). Progressive taxation is also used to make the distribution of income more equal. Capitalist system tends to work best when there are some very rich that lead the economy and thus help the poorer ones as well. Thus conservatives have made the tax system gradually less progressive. Pension schemes are also taken out of the public contents and private pension schemes and such are allowed to operate. But concerning public opinion as more people earn below the mean wage that above that (distribution is skewed), so pubic favours progressive taxes. They also like state pension schemes, because there is less hassle associated with it and you can get them irrespective of your work done, that again most people prefer. I talked about the conservative party ideology, New Labour has now come quite close to that, but they still prefer to make the rich pay more to restore fairness, etc. In economic terms distribution is carried out by economic subsidies (as they can include subsidies to industry besides the welfare payments). This has the effect of increasing the supply curve, which causes dead-weight loss causing from overproduction, unless there are externalities to be considered. On all these cases above there were clearly negative externalities. People don't realise that they need education, so education has positive externalities, the same way as health.

Policy should stabilise the economy. Thus we have special unemployment benefits to help the people without work. They were considered to be a temporary safety net when they were first founded, but now people are abusing the system and are living on these benefits. Thus the conservative government have tried to target the benefits more. Critics have said that is just to reduce the numbers unemployed statistically, but in reality they have helped to reduce the poverty trap arising when the benefits are lost when people go back to work, thus their real income rises very little. Price stability should also be pursued, that means eliminating inflation. This one of the main aims of government policy today. It is argued that high inflation redistributes income from fixed earnings (i.e. pensioners) to wage and profit earning people. It causes instability in economy and thus reduces investment. Although it does help to make fairer wages (it is hard to lower wage, but it can be left the same and thus in real term it can lower). It also rises extra revenue for the government as people move to higher tax bands (not anymore) and as taxes are generally very volatile. Thus 0 inflation is undesirable and government tries to obtain below 2.5 % inflation. But the public opinion, specially that of the industrial sector, CBI, is that the high interest rates are bad and unpopular. Also conservative party ideology of pro-market makes them reluctant to use fiscal policy as they think it causes inflationary spiral making community dependable of fiscal injections that are inflationary and cause dead-weight losses.

Policies should also make the economic growth stable and self sustainable. Trade cycles with its booms and busts cause again instability in markets and discourage investment. They also increase unemployment in down turns and inflation in booms. Thus government at present uses policies to eliminate the cycle. Again public opposes the tax rises before the boom meant for preventing the boom.

The tools the government uses mainly are the fiscal and monetary policies. Without getting into much detail the fiscal policy was developed by Keynes and implemented after the second world war. It deals with the management of the aggregate demand. In times of recession government should run a budget deficit and borrow more in order to increase the GDP to a multiple effects (government investment being re-spent and causing even more demand). This is caused a loose or  expansionary fiscal policy, tight fiscal policy is concerned with rising taxes to constrain the economy. It seems now that the government is going to use the expansionary policy this year, but only because the elections are coming and this is more popular. Labour party ideas are more favourable to fiscal policy. Over-expansionary fiscal policy with high PSBR increases the national debt and the interest rate that has to be paid on national debt.

Monetary policy is the one that the government deals now with most of the time. It consists of managing the money supply (done in the past, not now) and altering the interest rates through the Open market operations and such. The Bank is responsible for carrying out this policy. UK used to have a medium term financial strategy, now it only controls the inflation. When interest rates are lowered through lowering the sale of Treasury Bills, then the economy expands and it reduces unemployment, but can cause inflation. The opposite is called a tight monetary policy for reducing inflation through rising interest rates. High interest rates make the servicing of national debt more expensive, again the CBI and homeowners with mortgages do not favour that.

Prices and incomes policy (direct control on wages and the prices are not allowed to rise) were also used a while ago to control inflation. The policy proved ineffective in the long-term, as soon as they were abolished inflation picket up very quickly. The latest invention is the supply side policy meant for making the markets (especially the labour market) more flexible and efficient in order to increase employment and foreign investment to the UK. Thus Britain has objected the Social Charter and the minimum wage imposed in the EU. But the health and safety of workers should still be monitored.

Unfair trade practices can be controlled by the opposite of this policy - the regulation of industry and commerce(competition policy). Although the UK tends to use more the anti-union policy, that conflict with each other. Special directives for banks are also included in this section. England also has a monopolies and mergers policy. The economic theory tells that the monopoly restricts output and rises the prices, thus earning monopoly profits and reducing the welfare. On the other hand it can achieve considerable economies of scale. Public opinion is against monopolies as it seems as they are unfair and exploiting. Conservative policy has been somewhere in between, monopolies are only allowed when there are obvious economies of scale to made or the industry is a natural monopoly.

Welfare, although mentioned above, can be viewed as an independent policy. It has two part in England at present. Social security system that is basically the national insurance, whereby everybody are paying something and when a person becomes s/he will receive benefits. A negative income tax is a proposed reform for that system to eliminate cheating and poverty traps, but otherwise all three groups support that. On the other hand there are welfare services like NHS, they are not efficient as conservatives claim and thus reforms have been conducted and a further voucher scheme is proposed.

Exchange rate policy is also sometimes used to keep the pound at a stable level. Here there are many conflicts here - stable currency encourages investment, but when the exchange rate is too high exports sour and industry will decline. Politically and at public level strong pound is something desirable, but industry prefers lower. After the UK left the ERM there has been no direct controls on the exchange rate, but there soon could be as the economy is running a balance of payments deficit that could damage it.

Previously the government used to make all the policies, now the size of government has grown too much, so there is a cabinet of about 20 ministers, who lead the most important departments. They debate all the important policy issues. Models of economic policy making. UK is different because government is uniform and powerful and thus can force unpopular laws through relatively easily. But Crossman, who was a cabinet minister, noticed that the prime minister is becoming very important in determining policy as he is the leader of the party. Electoral preferences of parties are the images of their leaders. So he becomes a key figure. The government is also growing in size, so it needs a co-ordinator. Also the heads of department are more busy and they have no time to get involved in other departments' work. He also appoint the members and summarises all the motions.

Again recently there are many organised interest groups emerging who influence the policy in a direction the want offering votes, contributions an endorsements for exchange. These groups are not elected, but they sometimes represent the necessary policy changes better that the elected members of the government.

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